We at the M&A law prof blog haven’t spent much time addressing the new financial reform bill, but those who are interested should definitely read through the terrific masters forum on the Conglomerate addressing various aspects of the bill. There are also many other useful blogs addressing the bill, but it would take a whole page just to list all of them (although do keep up with the Harvard Corporate Governance Blog and the conglomerate for good links).

For day-to-day M&A deals, the most immediate relevant provision is “say on golden parachutes” which requires that in any proxy or consent solicitation for a meeting of shareholders occurring 6 months after the date of enactment of the Act (i.e. starting in January 2011) where shareholders are asked to approve an M&A transaction, companies must provide their shareholders with a non-binding shareholder vote on whether to approve payments to any named executive officer in connection with such M&A transaction. It’s worth taking a look at this Cleary Gottlieb client alert on what exactly this means for M&A deals and what isn’t clear (as you may guess, there is some lack of clarity!). For others who want more detail, Davis Polk (disclosure: my former employer) has a useful 130 page summary of the bill, plus a set of super nifty regulatory implementation slides which are pretty helpful in understanding what needs to be done next. Of course, you can also read all 2300 pages of the bill…

One
transaction that's been drawing a lot of attention in recent days is Hugh Hefner's bid to
take Playboy Enterprises (don't worry, the link
is safe for work) private for $5.50/share. Hefner presently
owns 69.5% of PEI’s Class A common stock and 27.7% of PEI’s Class B common
stock. The Class B stock is no vote stock. Because Hefner is
the controlling shareholder, the transaction when it's reviewed by the courts (and it will be - see para below re lawsuit already in place) will be subject to one of the controlling shareholder standards, depending on the form which the transaction ultimately takes place.

Vice Chancellor Laster's decision in In re CNX Gas brought this issue to fore. He invited the Delaware Supreme Court to weigh in on the various standards governing controlling shareholder transactions with back end freeze-outs and proposed a unified standard (also see In re Cox Comm'n). The proposed Playboy transaction may give the courts an opportunity to weigh in on the unified standard.

Some of this is a bit premature, as the parties have not yet agreed to terms, much less to a structure for this proposed transaction. However, the current state of the doctrine can and should influence decisions on how to structure the transaction. In short, a negotiated transaction with a controlling shareholder in the form of a statutory merger will, upon a challenge, be subjected to entire fairness review (Kahn v Lynch). On the other hand, if the transaction is structured as a unilateral tender offer followed by a Sec 253 short form merger, the board's actions with respect to the transaction will receive the deferential business judgment standard (in re Siliconix). Of course, if you're Hefner and you're worried about a possible legal challenge, you structure the transaction as a unilateral tender offer with a back end freeze-out.

Of course, the unilateral route leaves the door open to a topping bid - Penthouse (Friend Finder) is already interested. And some have already asked whether the Playboy board must the company to the highest bidder (i.e. Penthouse). Of course, the board is free to pursue an auction. But, there's a problem.

Hef doesn't want to sell. According
to the PLA's announcement, Hefner is not interested in third party offers.

In
the proposal letter, Hefner advises the board of directors that out of Hefner’s
concerns for, amongst other matters, the PEI brand, the editorial direction of
the magazine and PEI’s legacy, Hefner is not interested in any sale or merger
of PEI, selling Hefner’s shares to any third party or entering into discussions
with any other financial sponsor for a transaction of the nature proposed in
the letter.

Although as controlling shareholder, Hefner has an obligation to deal fairly with minority shareholders, such a duty does not require him to sell if he doesn't want to. If the board doesn't want to do a deal with him, Hefner is free to vote 'no' to any other deal they propose, or in the event the alternative transaction is structured as a tender offer, not to tender his shares.

The result may well be that Playboy gets sold to Hefner at a "fair" price not necessarily the highest price. For shareholders, that's just the cost of buying a minority position in a company where there is a control block. Don't expect much of a premium.

The inevitable lawsuit:No surprise, a lawsuit has already been filed with respect to this transaction. The general allegation is that the board violated its fiduciary duties to the corporation for selling Playboy to Hefner "too cheaply." Let's put aside the question of whether such a Revlon claim has any real legs. I'd just like to flag that the lawsuit alleges the board sold the company too cheaply. They seem to have jumped the gun. No one has announced a sale, simply that Hefner has made an offer. The board hasn't even made a recommendation, yet.

I suspect, given that there's already a lawsuit in place accusing them of fiduciary wrong-doing that the board will take its time and pay close attention to the sale process.